The success of a restaurant depends on a wide variety of factors. These factors are delicious food, great location, superior customer service, and a steady supply of funding. There are a lot of expenses involved in running a restaurant. Without financial backing, it is impossible to run a restaurant business.
In the first six months of the pandemic, one out of six restaurant businesses had to close. This fact alone will make anyone think twice before opening a restaurant. Fortunately, the worst of the pandemic seems to be beyond us as we are moving on to a better world. There is increased demand among people to have a dine-in experience in restaurants. If you have been passionate about starting or expanding your restaurant, now is a good time to follow your dream.
To run your dream restaurant effectively, you need to have a steady supply of capital. There are a lot of costs involved in running a restaurant. You need money to rent or buy space, hire staff, manage inventory, marketing, etc. It’s hard for any individual to have that kind of money on his own. If it is difficult or impossible for you to manage thousands of dollars on your own, you need to turn to restaurant financing.
You need funding to get your business up and running. It takes businesses ample time to become profitable. Funding helps you cover the expenses until your business becomes profitable. The process of securing funding is a great learning experience for any aspiring restaurateur. It forces the restaurant owner to think about the financial implications of the business and come up with a solid plan on how to be profitable.
We will be looking at some of the best options to secure financing for your business. Whether you are looking to start or expand your business, these will be helpful for you. We will discuss the pros and cons of each of these options.
Merchant Cash Advance (MCA)
Merchant Cash Advance is a way of securing a lump sum of money in return for a percentage of profit on future sales. These advances are offered by merchant payment systems and they act as a loan against your future credit and debit card receipts. Institutions that provide merchant cash advances provide capital to businesses. In return, they will get a fixed percentage of the sales until their loan is repaid. The amount to be repaid will be set beforehand and it will be greater than the original amount. It will make sense if we look at an example.
Let’s say your restaurant receives an advance of $30000 for a 10% markup. Now, you will have to pay the advance provider $33000 from your future sales. The payment to them will be automatically made from your credit and debit card sales.
- MCAs are great for you if you have a steady flow of regular credit and debit card sales.
- It’s a simple and unrestricted way to secure funding. If you have steady credit and debit card transactions, it will be easy for you to get an advance.
- You can get funding really quickly. In some cases, it takes as little as 2-3 days.
- You can’t pay it back early to save interest rates. The payback amount is already set and you will have to pay it in full.
- This option is not ideal for new businesses as some business history is required to get these loans.
- It is not ideal for businesses that do most of their transactions in cash.
Small Business Administration Loan
SBA Loans are a great way for small businesses to secure funding. The SBA guarantees to repay a certain percentage of the loan to the bank if the borrower is unable to repay it. The most common SBA loan for restaurants is the SBA 7(a) loan. These loans typically cover expenses to purchase an existing restaurant, purchase equipment for the restaurant, and renting or buying space for the restaurant.
- It is easier to qualify for SBA Loans than traditional bank loans.
- The loans are backed by the government and you can get up to a $5 million loan.
- If one institution rejects your application, you can still seek approval from other institutions.
- Loan approval can take up to months.
- A lot of detailed documentation is required to get approval for the loan.
Business Line of Credit
With a business line of credit, you can secure loans as you need them. You won’t have a lump sum of cash but you will have a line of credit that you can use whenever you need it. You will be able to borrow the amount that your line of credit allows you to.
It’s a flexible option for you to use. You will only pay interest on the amount you borrow. It works similar to a credit card but better. The limit is higher and the interest rate is lower than a credit card.
- It’s a flexible option for you to secure loans as you need them.
- You only have to pay interest on the borrowed amount.
- You need to pay administrative costs to keep your line of credit open.
- It is not a long-term financing solution.
Friends and Family
If all your efforts to raise capital fail, your friends and family are likely to be your biggest supporters. This may seem like a scrappy option but having people you love and trust to back you in your journey is actually a viable option.
- No paperwork or detailed documentation is required.
- You don’t need collateral to get a loan from your family and friends.
- It has the potential to destroy personal relationships if things go south.
- The terms and conditions of the deal can end up being confusing and unclear.
Finding a way to secure funding is a key ingredient in your restaurant’s recipe for success. You need to prepare well to secure funding for your restaurant. Have a clear and concise business plan that you can be proud of. When pitching your ideas to your potential investors, predict the objections they are likely to raise and provide logical answers to those objections. Securing funding will allow you to make your dreams come true.